Executive summary
- The chances of limiting global warming to 1.5°C are now slim, but every fraction of a degree above the target adds risks and costs
- Transitioning to net zero also comes with a cost, but the costs of not acting on climate change are greater
- Acting earlier would be more effective and less costly than postponing action
- Climate change is already contributing to extreme weather events, but forecasting future risks is highly complex.
The battle to limit global warming to an average 1.5°C may already have been lost. The Emissions Gap Report from the United Nations Environment Programme reported last year that there was "no credible pathway to 1.5°C in place".1 Without accelerating action global temperatures will rise by 2.8°C by the end of this century, the report warned.
Many climate scientists believe that whatever policies are yet to be implemented by governments and industry, 1.5C is now out of reach. Among them is Professor Sir Bob Watson, former head of the Intergovernmental Panel on Climate Change (IPCC), who said he was "very pessimistic" that global warming could even be limited to 2°C.2
But now isn't a time to give up. Professor Watson was also insistent that abandoning targets would be a mistake — the risks of allowing uncontrolled climate change are simply too great. As the UN report emphasised, "Every fraction of a degree matters."
While greenhouse gas (GHG) emissions aren't being curbed at the required rate, efforts to date have made a difference. The International Energy Agency (IEA) reported that CO2 emissions rose by 0.9% in 2022, slower than the 3.2% growth of the global economy.3 Progress is possible and is being made; we just need to do more.
Insurance as an industry can make a difference in this global effort, through enabling investment in the transition to net-zero atmospheric emissions and by helping the world adapt to the impacts that can no longer be avoided.
The balance of risks
Climate change presents two closely intertwined types of risk — transition risk and physical risk. Limiting global warming would require a major transition of the global economy. While doing nothing involves no transition cost or risk, it poses far greater potential physical threats. But this trade-off isn't linear. Over the long term, failure to tackle climate change would involve enormous financial cost to the global economy and to people’s lives across the globe.
Furthermore, the sooner action is taken, the steadier and more managed the transition can be, keeping the economic costs down. Conversely, delay is likely to lead to the need for sudden and dramatic action that would be far more disruptive. The landmark Stern Review of 2006, commissioned by the UK government, warned that "limits on the ability to cut emissions rapidly, due to the inertia in the global economy, mean that delays to action can imply very high costs later".4
The insurance industry has a vital role to play in helping to manage this challenge. Providing cover for transition projects can significantly mitigate the financial risks involved, helping to improve capital flows to renewable energy for example, or assisting in an orderly and cost-effective wind-down of highly emitting activities.
Enabling the transition through financial risk management can tip the balance decisively in favour of acting now, rather than delaying further.
The cost of inaction
The IPCC has estimated the effects of varying degrees of global warming. The frequency of heatwaves, severe rainfall and droughts all increase as the average global temperature rises, according to an assessment report from the IPCC on impacts, adaptation and vulnerability to climate change.5
The report states that the near-term effects of global warming reaching 1.5°C "would cause unavoidable increases in multiple climate hazards and present multiple risks to ecosystems and humans... Near-term actions that limit global warming to close to 1.5°C would substantially reduce projected losses and damages related to climate change in human systems and ecosystems, compared to higher warming levels, but cannot eliminate them all".
Further, the near-term risks vary across regions and are "highest where species and people exist close to their upper thermal limits, along coastlines, in close association with ice or seasonal rivers".
The report also highlights that the complexity of effects means they're becoming increasingly difficult to manage and that multiple climate change effects will result in "compounding overall risk and risks cascading across sectors and regions".
But we don't have to wait to see some of the effects of climate change as its fingerprints can already be found in current extreme events. This type of work is known as "extreme event attribution" and is a rapidly growing area of research.
A major contributor to this field is the World Weather Attribution initiative, set up in 2015 to assess the contribution that climate change is making to the likelihood and intensity of extreme weather events, using weather data and computer modeling. In May and June of 2023, wildfires destroyed 13 million hectares of forest in Canada. World Weather Attribution’s analysis concluded that climate change had doubled the chance of extreme fire weather conditions in the region.6
Heatwaves hit many regions of the world over the Northern Hemisphere in the summer of 2023, leading to record temperatures in parts of the US and Mexico, Southern Europe and China — and rising heat-related deaths. Again, analysis by World Weather Attribution found these heatwaves were also made far more likely by climate change.7
According to the initiative’s report, "Without human induced climate change these heat events would however have been extremely rare. In China it would have been about a 1 in 250-year event while maximum heat like in July 2023 would have been virtually impossible to occur in the US/Mexico region and Southern Europe if humans had not warmed the planet by burning fossil fuels".
Efforts to model the future economic cost of complex changes are fraught with difficulty, involving several different modeling frameworks used in broader science and catastrophe analytics. But the reality of such costs cannot be doubted.
The Network for Greening the Financial System (NFGS), a network of central banks and financial supervisors, uses IPCC models to describe a range of "plausible futures".8 These scenarios aren't intended as forecasts, but rather as a starting point for further research and analysis.
The world may not be on target to meet the UN’s climate change targets, but this miss cannot be an excuse for further backsliding. The battle to control climate change must go on, and insurance can provide the incentives and capital protection needed to facilitate investing in the transition and limit global warming.
At the same time, a degree of climate change is now inevitable and is highly likely to have contributed to some recent catastrophes. The insurance industry must adapt its analytical skills and business models to match this new world of risk.
For more information, see Gallagher Re’s Public Sector and Climate Resilience Solutions.
